Credit Crunch Worsens: Libor Spikes, Commercial Paper Outstanding Contracts

One of the most troubling aspects of the credit crunch is that even large companies are now seeing its effects. By way of background, the commercial paper is a significant source of short-term funding for big companies and financial firms. Commercial paper is unsecured IOUs (there is another type of commercial paper, “asset backed commercial paper” but we are focusing here on the traditional, plain vanilla kind). CP can go out as long as 270 days, but the bulk placed is 30 to 90 days.

When Lehman failed, losses on its commercial paper led the money market fund Revere to “break the buck”, that is, go lower than its promise (but not guarantee) to manage its holdings so as to maintain a $1 net asset value per share. That is key because money market funds are widely viewed by consumers as an alternative to bank deposits.

Consumers and institutional money market investors began moving funds out of regular money market funds into Treasuries or government bond money market funds. Even though the Treasury program to offer insurance to money market funds stopped the run, the amount now held by non-government money market funds has contracted significantly. Since they are big buyers of commercial paper, this has reduced the size of the pool available to invest in CP significantly.

The first update comes from Bloomberg:

Interest rates on three-month dollar loans rose to a nine-month high, short-term corporate borrowing fell by the most ever and leveraged loans tumbled, exacerbating the credit freeze that’s paralyzing businesses around the world.

The London interbank offered rate that banks charge each other for loans rose for a fourth day…..The biggest drop in financial short-term debt outstanding since at least 2000 caused the U.S. commercial paper market to tumble 5.6 percent to a three-year low, according to the Federal Reserve.

The crisis deepened after the worst month for corporate credit on record. Leveraged loan prices plunged to all-time lows, short-term debt markets seized up and even the safest company bonds suffered the worst losses in at least two decades…

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened as much as 25 basis points to 3.6 percentage points, the highest since Bloomberg began compiling the data in 1984. The spread is currently at 3.53 percentage points.

Rates on three-month Treasury bills fell 12 basis points to 0.68 percent. The bills touched 0.02 percent on Sept. 17, the lowest since the 1940s, as the bankruptcy of Lehman Brothers Holdings Inc. sparked a run on the safest securities.

Interbank rates have soared as financial institutions hoard cash to meet future funding needs amid deepening concern that more banks will collapse. Governments in Europe and the U.S. rescued six financial institutions in the past week. The Libor- OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, widened to a record 260 basis points today. It was 197 basis points a week ago and 79 basis points a month ago.

Libor for euros advanced 3 basis points to a record 5.32 percent. Libor, set by 16 banks in a daily survey by the British Bankers’ Association, is used to set rates on $360 trillion of financial products worldwide, from home loans to derivatives.

“We still see upward pressure on maturities from one week,” said Patrick Jacq, a fixed-income strategist in Paris at BNP Paribas SA, France’s biggest bank. “The situation is still blocked and we’re unlikely to see spreads decline before confidence has been restored.”

The market for commercial paper plummeted $94.9 billion to $1.6 trillion for the week ended Oct. 1 as banks and insurers were unable to find buyers for the short-term debt amid the worst U.S. financial crisis since the Great Depression. Financial paper accounted for most of the decline, plunging $64.9 billion, or 8.7 percent, to a two-year low.

The market dropped for a third straight week, losing a total of $208 billion, as money-market funds faced withdrawals from investors, said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York.

“The purge is broad and is impacting issuers with far more predictable cash flows — regular run-of-the-mill companies in need of working capital,” Crescenzi wrote today in a note to clients. “The declines add to the urgency for fixes to the credit crisis and bolster the case for a Fed rate cut.”

The U.S. market for short-term debt backed by assets including mortgages and car loans fell $29.1 billion, or 3.9 percent, this week to a seasonally adjusted $724.7 billion, according to the Fed.

While banks, brokers and insurers have struggled to issue commercial paper, non-financial companies such as Caterpillar Inc. and Fairfield, Connecticut-based General Electric Co. have had less trouble. The market for non-financial issuers of the debt was little changed this week at $199.1 billion after rising to an almost seven-year high last week of $217.2 billion, the Fed data show….

Lenders are balking at offering cash for longer than a day even as central banks pump an unprecedented amount of money into the banking system…

Leveraged loan prices tumbled 8.57 cents in September to a record low of 79.8 cents on the dollar. Price declines will make it harder for junk-rated companies to borrow as investors may opt to buy existing debt at distressed levels and as capital- constrained banks restrict lending.

Corporate bonds with the highest AAA ratings lost 6.5 percent in September, the most since at least 1989, according to Merrill Lynch & Co.’s U.S. Corporates, AAA Rated index.

And more from Tony Crescenzi vie RealMoney ($, hat tip reader Michael):

The commercial paper market had been relatively stable since contracting sharply a year ago, and in recent weeks it had seen strong increases in the total amounts outstanding, so this latest decline marks an abrupt shift. Reflecting the drying up of credit availability in the commercial paper market, commercial paper rates have surged. For example, the seven-day rate for asset-backed commercial paper has jumped to 4.50% from the roughly 2.5% rate that had prevailed over the past few months. A continuation of this trend would be problematic for the economy, as the commercial paper market is where entities go to raise working capital to produce goods and services….

…issuers with mortgage-related exposures have been pushed out of the market, and this is what makes this latest round of seizing up worrying, because the issuers that remain are considered far more stable entities with more predictable cash flows.

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  1. EvilHenryPaulson

    FT Alphaville linked back to NakedCapitalism on the subject of the Treasury muscling out other short term borrowers. It was second only to a post making fun of the French in its popularity.

    They also included a chart they posted earlier of Commerical paper vs Treasuries for those unwilling to believe the story that the government’s interest rates are not rising and equilibrium is not being re-established.

  2. Anonymous

    Great presidential addresses to “calm the masses” have been on record through the centuries. Never, never have we had addresses to PANIC people before , like this. In his effort to scare congress into voting for this bill.. he has set off panic on main street. (If you don’t vote for this it is the end of mankind!) I do NOT think this has been a good policy.

  3. Anonymous


    This is the economy pounding its fist on the table, demanding
    Congress pass Paulson’s plan. Will you now reconsider your opposition? Or would you still wait for a “better” plan, a “more considered” plan, a “more trustworthy” plan, a “more detailed” plan, a new president, a new treasury secretary, a new moon,…

    The plan is the plan and Paulson is the guy. They are both the best we have “right now”, and “right now” is when we need to do something because the costs are only going to increase (see Buffett’s interview on Charlie Rose where he makes exactly this point).

  4. Francois

    Lenders fear not to be repaid if they loan, ergo, they hoard cash.

    Biz and consumers can’t get loans to finance normal operations, ergo, their operations stall.

    If operations stall, ergo, there is less money available to repay whatever you owe.

    Lenders, seeing their fears confirmed, get even more fearful, ergo, they hoard even more.

    This is the classic vicious circle, and it is already activated.

    Pray inform this non-economist non-financier poster how is the Paulson plan suppose to address this problem?

    I CANNOT find any instance where the Secretary of the Treasury gave a clear explanation of how this is supposed to work, and what is the likelihood that it’ll work.

  5. doc holiday

    Re: Reflecting the drying up of credit availability in the commercial paper market, commercial paper rates have surged. For example, the seven-day rate for asset-backed commercial paper has jumped to 4.50% from the roughly 2.5% rate that had prevailed over the past few months. A continuation of this trend would be problematic for the economy, as the commercial paper market is where entities go to raise working capital to produce goods and services…."

    >> This is like WaMu and Indy Bank looking to build cash reserves or to move working capital to places where it may be liquid in the short-term.

    It seems like Treasury would try to change the yield curve at this stage and stop acting like we have a super-strong recovery about to kick in as Bush leaves office. That political bullshit has to stop, i.e, the yield curve should force capital into the long end and force the short end buyers to think longer term rewards. Providing opportunity in safe long term yields would act like candy and take short term speculation fever out of the market — then again, I have a 5th grade education and sniff glue…

  6. joe

    Shorter and shorter time frames for greater and greater quantities of capital.
    This is where the invisible hand has placed the financial economy of the people of the United States.
    Great job, everyone. Mission Accomplished.
    And I do not mean that in a partisan way.

    This is what happens when you have an economic philosophy that is privately financed without an exit strategy.
    Yes, I asked if this is the end of capitalism.

    Don’t you ever wonder why it wasn’t somebody’s job to make sure that this thing didn’t happen?
    Monetary inflation driving an uneconomic explosion in housing stock and prices, and derivatives thereof, that was destined to fall apart in a very hurtful way.

    Wasn’t anybody in charge of the national economy to see that it would grow in a way that avoided this painful economic episode?

    anon at 4:58, a.k.a. ‘the economy’ calls the capital shortage, or hoarding, crisis as a demand to adopt Paulson’s plan.

    Though the comment was aimed at Yves, it was obviously meant mostly for those of us who are not “the economy”.

    And it’s hard to argue with a capital shortage, isn’t it.

    In 1913, Congress passed the Federal reserve Act and gave THE MONEY POWER to a cartel of private bankers who have manipulated the financial system to the point we now have in front of us.
    Complete with overt threats from the bankers that they will take us all down without another bailout, after which there will be another.
    The 1913 deal required the FED bankers to provide for economic and price stability.
    How does it feel?
    The crisis on Main Street can best be effected through a direct infusion of capital on that level.
    A direct infusion of government-issue, debt-free credits paid to the people of the United States.
    That is all that is needed to keep the US economy going.
    One thing at a time.

  7. Richard Kline

    “The market for non-financial issuers of the debt was little changed this week at $199.1 billion after rising to an almost seven-year high last week of $217.2 billion, the Fed data show . . .”

    The real economy with assets one can readily price is having no great difficulty raising CP from the large volume of private capital sitting this one out. It is the _financial firms_ trying to finance or rollover their securitized LBOs, MSBs, ABSs and the like which are having severe trouble, and the run-of-the-mill financial participants who are choking. I’m not saying this to suggest that ‘we can do without the financials;’ we can’t. But the issue is that those financials have dodgy, non-transparent numbers, exposure to all kinds of crap which neither they nor anyone else can price, and had become addicted to cheap short money in the last decade. Sooo we need to get failed funds out of the market, and to get bogus assets marked down. Come that day, there will be much less stress floating CP. But when financial firms look from the outside to be made of TP which everyone knows isn’t clean, of course no one wants to lend them a hand.

    Credit spreads do not imply that the world has come to and end: it hasn’t, for firms with real assets. For the FIRE participants, their world has down a rollover, from Olympus to Tartarus. The longer they take to price down their trash, the longer they’ll stay there sucking sewage.

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